The Markets' Verdict on the Debt Deal

Let's take a moment to recall the logic of the deficit hysteria and the related deal just signed by President Obama. The economy, supposedly, was mired in stagnation because of a lack of "confidence." That confidence gap, in turn, reflected anxiety about the escalating deficits and national debt. Deal with the debt, and businesses would invest; consumers would spend, and recovery would return.

As some of us have been writing almost since the Obama administration began, that view of the crisis was always absurd. With Americans out of work, and out trillions of dollars in home equity, consumers weren't spending. Business was neither hiring nor investing. The deeper deficit reflected the reduced revenues of a deep recession, but government was laying off workers, too. Very low interest rates suggested that no serious person was worried about inflation -- the bigger worry was deflation.

Well, now we have the grim proof. The very day Obama signed the deficit deal, the Dow lost 266 points. And yesterday, the key index shed another 515. The reason: The markets focused on increasing evidence of a weakening real economy. Despite the echo chamber, Beltway obsession about deficits and debts, investors never cared much about that.

And the statistics about the real economy keep worsening. The July jobs numbers, just out from the Bureau of Labor Statistics showed the addition of just 117,000 jobs. The slight drop in the nominal unemployment rate was entirely due to people leaving the labor force, not an increase in the percentage of workers with jobs.

But it's bleak satisfaction to say, "I told you so" unless these revelations lead to a changed politics. What sort of scenarios can we imagine going forward?

Despite the plan to have even steeper cuts kick in around Christmas after the special congressional joint committee reports in, I doubt there will be much enthusiasm for a second round of belt tightening as the economy keeps weakening. But what then?

The right will call for more tax cuts as a form of stimulus (and reward for their wealthy patrons). These tax cuts would be offset by even deeper cuts in public outlays.

And the center may join the push for tax cuts (though the two rounds of Bush tax cuts did nothing to head off the economic collapse of 2008).

For instance, Anita Dunn, former Obama communications director, is calling for a "tax holiday" so that U.S. firms can repatriate the roughly a trillion dollars in profits that are stashed abroad to avoid taxation. Dunn, in her current role as lobbyist/strategist (mixed with her role as TV commentator) is advising Cisco Systems CEO John Chambers, a leading corporate advocate for a tax holiday as a supposed form of stimulus. This is the same Chambers who announced layoffs of some 6,500 workers in mid-July.

Ed Rendell, former Pennsylvania governor, on Dylan Ratigan, has also lent his support for this corporate tax holiday. Rendell is now a private lawyer and investment banker.

The close connections between the business wing of the Democratic Party, the Obama White House, and the corporate elite, plus Obama's continuing obsession with fiscal prudence, does not make one terribly optimistic that the president will drastically change course.

However, a different course is available. As economic stagnation deepens, Democrats could call for a real recovery program made up of public investment and jobs, financed by surtaxes on wealthy Americans, a crackdown on tax evaders, and taxes on financial transactions. This would make for a much more effective election year program than more belt-tightening, and would be far better for the economy.

The Congressional Progressive Caucus Budget shows, in detail, how such an approach could lead both to economic recovery and eventual fiscal balance.

For Obama to embrace this course would require him to turn away from his austerity advisers as well as his other corporate cronies (who are financing much his campaign). But his current course has proved to be bad economics -- and bad politics, with his approval ratings still sinking. And there is nothing like an impending defeat to concentrate the mind.

Some pressure from Democrats in Congress and in the electorate wouldn't hurt, either.